What The Big Ethereum 'Merge' Means In Crypto Land

A software upgrade is usually nothing to celebrate. But in the crypto world, this is apparently the case.

Crypto platform Ethereum is gearing up for a major system overhaul that would, among other things, make it more energy efficient. Analysts and investors say the proposed switch, known in crypto circles as “The Merge,” is boosting the price of Ether, the in-house token on the Ethereum blockchain.

As of 5:00 p.m. ET on Friday, Ether’s price is up 87% from a June 18 bottom. Bitcoin, the only cryptocurrency larger than ether, is up about 20% over the same period, according to Dow Jones Market Data. Aggregate open interest in ether futures on exchanges — a measure of investor enthusiasm for the cryptocurrency — has risen sharply since early July, according to data from The Block.

Of course, the ether rally could die down at any time. This month, Ethereum co-founder Vitalik Buterin said via twitter that the upgrade should take place on or around September 15, although he said the exact date is not guaranteed. The merger has been in the works for years and has been delayed several times for technical reasons.

For miners who have invested in hardware to mine ether, the upgrade could hurt.

Photo: erdem sahin/Shutterstock

The upgrade is, in part, a difficult technological undertaking given that thousands of decentralized applications worth billions of dollars are already running on the Ethereum blockchain, according to Katie Talati, head of research at crypto asset manager Arca.

“Because there is so much potential for depreciation, they had to be very careful at every step of the roadmap to make sure there weren’t any issues or flaws,” Ms. Talati said.

Some investors think this is a recipe for trouble.

“The Ethereum team is trying to fix a plane mid-flight,” said Cory Klippsten, founder and CEO of Swan Bitcoin, a bitcoin financial services company. “They’re trying to make massive changes to it while it’s actually in service.”

Ethereum Foundation researcher Danny Ryan expressed confidence in the September launch. The Ethereum Foundation is a non-profit organization that supports Ethereum and related technologies.

“It’s probably the most complicated blockchain upgrade that’s ever happened, but the amount of prep work, testing, and security analysis that went into this upgrade is pretty amazing,” Ryan said.

Ethereum is a platform for developers to build and run crypto applications, similar to IOS or Android. But instead of being controlled by Apple or Google, these applications are decentralized.

WSJ’s Dion Rabouin explains why many investors are still betting on crypto despite the very real risk of losing all their money. Picture: Rami Abukalam

The crypto market has mostly been in the doldrums since its November peak. Some analysts and investors see the Ethereum upgrade as one of the few upcoming catalysts that could revitalize the market.

The upgrade is called a merge because it is the merging of the current proof-of-work Ethereum blockchain and the proof-of-stake “beacon chain” created by Ethereum developers.

Both Proof of Work and Proof of Stake are mechanisms that cryptocurrency networks use to verify transactions and add them to the blockchain.

Bitcoin pioneered the proof-of-work model, in which a global, decentralized network of computers solve complex mathematical puzzles to process transactions and earn rewards in the form of newly created bitcoins. The people and companies that set up these computers are called miners. The process is energy intensive as the network requires miners to run powerful machines 24/7.

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In contrast, Proof of Stake allows users to participate in securing a network by risking their own crypto holdings. The idea is that by locking their coins, investors have a financial incentive to ensure transactions are valid.

Last year, the NFT craze clogged the Ethereum network and sent transaction fees skyrocketing. Switching to the proof-of-stake model would likely make Ethereum faster, more secure, and more energy efficient. The Ethereum Foundation said the change is expected to reduce Ethereum’s power consumption by about 99.95%.

The two largest stablecoin issuers, Tether and Circle, have both said they would support the proof-of-stake Ethereum blockchain.

For users and investors, the newly upgraded Ethereum would work mostly the same. But for miners who have invested in hardware to mine ether, the upgrade could hurt.

“There are tons of miners and mining pools. They will immediately lose millions and millions of dollars in revenue if the merger happens,” said Kosala Hemachandra, CEO and founder of MyEtherWallet, an open-source cryptocurrency wallet software company.

Many proof-of-work miners are preparing to migrate to the new Ethereum blockchain and become so-called validators. However, some miners said they would continue to support the current Ethereum blockchain.

Write to Vicky Ge Huang at [email protected]